By a 51-50 vote, with Vice President Pence breaking the tie, the Senate has voted to overturn the Consumer Financial Protection Bureau's rule forbidding the use of contract terms (in covered consumer loan products) barring consumers to bring or participate in class actions. The affirmative vote was supported by the usual narratives: Class actions make credit more expensive, arbitration is a better and more efficient means for resolving consumer disputes, class action lawyers are greedy parasites, etc. The truth of these narratives is irrelevant, it seems. For instance, though it is possible arbitration might be used to efficiently and effectively vindicate consumer rights, there isn't much evidence that it does so in practice, and there is evidence to the contrary. As a mechanism for collecting consumer debts, the history of arbitration is uglier still. And even if the availability of class actions increases the cost of credit–emphasis on if–it's not obvious this would be bad. If class actions deter lender misconduct–not that there's any history of bank misconduct!–, and if this increases some lenders' costs and ultimately the cost of their financial products, then… I don't know. Who cares, I guess? Why should consumers victimized by fraudulent lender conduct subsidize cheaper credit for others? The contrary narrative–that class actions are just so darn expensive to defend that banks settle even the bogus ones for large sums of money–is so implausible that it should not be taken seriously without credible supporting evidence.  

Jeff Sovern has an excellent new article about arbitration clauses and class action waivers that uses the Wells Fargo fake account scandal as a test case.  He also does a monster job knocking down the Johnston-Zwyicki arbitration study.  As Sovern points out, the Johnston-Zywicki study makes a big deal out of some data on a Texas bank's voluntary refunds of fees in consumer disputes.  But as Sovern observes, Johnston and Zywicki aren't able to differentiate between fees due to bank misconduct and fees due to consumer behavior (account inactivity, overlimit, etc.), much less why the bank refunded the fees in some cases.  Highly recommended and relevant in the run-up to the anticipated CFPB arbitration rulemaking.  

[Link corrected 6/15/17 at 4:04pm ET]

Today, the U.S. Supreme Court decided Kindred Nursing v Clark, an arbitration case in which the Kentucky Supreme Court declined to enforce arbitration agreements between a nursing home and two patients. The agreements had been executed by relatives holding powers of attorney granting broad authority to enter contracts, but the Kentucky Supreme Court held that a power of attorney must specifically grant the authority to agree to arbitration. It was clear–as it often is–that the U.S. Supreme Court would reverse. The Kentucky rule just can’t be squared with governing federal arbitration law. Put simply, state law can't say that a broadly-worded power of attorney grants authority to enter contracts generally, except for arbitration clauses. Not surprisingly, then, the U.S. Supreme Court reversed in a 7 to 1 opinion authored by Justice Kagan.* The dissent wasn’t on the merits, either; Justice Thomas does not believe the Federal Arbitration Act applies to proceedings in state court.

I teach contracts and arbitration law, among other classes, and I find it increasingly frustrating to teach arbitration cases. So many involve plausible applications of contract law (like Kindred) but get the arbitration law flatly wrong. Others involve questionable applications of contract law or related doctrines, seemingly to avoid the effect of arbitration law. Here’s a recent case by the Maryland Court of Appeals, Cain v Midland Funding, which falls into the latter camp.

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